Home ownership is a dream of most individuals. However, when the time comes to purchase this first home, many people become nervous. They understand this is a significant financial decision in their life, and they must plan and prepare for the purchase. What steps should they take to ensure they are financially ready for this significant step?
The process can seem overwhelming for first-time homebuyers. When they have a checklist to follow step by step, they feel more confident in moving forward with the purchase. The following steps should be taken by anyone looking to purchase a home to ensure a successful transaction.
Credit Score
Every person looking to purchase a home should review their credit score. Lenders consider this credit score when determining whether a person qualifies for a mortgage and what interest rate they will be offered. Fortunately, men and women can get a free copy of their credit report from the three major credit bureaus. Once these reports have been attained, the individual should dispute any errors and pay down high-interest debt. Never request new credit when applying for a mortgage, as this will result in a negative mark on the credit report.
Set a Budget
Individuals must know their budget when purchasing a home. They need to consider their current income, monthly expenses, and any potential future changes in income or lifestyle that may occur. Experts recommend spending no more than 28% of an individual’s gross monthly income on housing costs. The mortgage and other debt payments should not exceed 36% of this amount. When considering housing costs, include the mortgage payments, real estate taxes, insurance, maintenance, and repairs.
Down Payment
Buyers should have a down payment to help lower the monthly expenses. Most lenders require a down payment, and putting these funds down may help to eliminate private mortgage insurance. In addition to the down payment, a buyer should save for closing costs, which can equal up to 5% of the purchase price. Furthermore, it is recommended that buyers have an emergency fund in place that covers up to six months of living expenses after they purchase the home.
Loan Options
First-time home buyers should understand their loan options. FHA loans require a low down payment, while VA loans are reserved for those who have served in the military. Men and women buying a home in a rural area may qualify for a USDA loan. Consider conventional loans, first-time homebuyer assistance programs, and grants.
Secure Pre-Approval
Experts recommend securing pre-approval for a loan before looking for a house. Sellers like to see this pre-approval because it shows that the buyer is serious about purchasing a home. Furthermore, the pre-approval letter informs the buyer of their maximum house payment amount. To secure this pre-approval, the borrower must have proof of their income, a copy of their credit report, something to verify their employment, and information about their debt-to-income ratio. If a potential buyer cannot seek pre-approval, they will have information about which areas they need to strengthen before trying again.
Find a Realtor
Once a buyer is ready to begin looking at homes, they should find a real estate agent to work with. Although homes can be viewed online, working with a realtor gives a buyer access to properties that may not be on the market yet but are coming soon. The realtor will also help negotiate prices, pricing, and contingencies for buyers while handling the paperwork and legal aspects of the transaction. Look for a realtor who frequently works with first-time buyers so they can guide you through the entire process.
Buying a home is one of the most significant purchases a person will make in their lifetime. The first time someone goes to purchase a home, they are often scared because they don’t know what to expect. There is no need to be frightened; learn as much as possible about the process, work with an experienced real estate agent, and buying a home will be easier than expected.
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